Business loan

Requirements for Getting Approved for a Small Business Loan

Getting a business loan in 2020 is no small feat. Between the global pandemic and the ensuing economic downturn, lenders on all sides are worried about protecting their cash flow and protecting loans from default. At the same time, millions of American businesses are struggling for the same reasons that give lenders pause, so millions of people are looking for funds at the same time that lenders are cracking down.

With so many demands on lenders, creditors are rightly concerned about screening potential borrowers in light of the current economic climate, so getting credit can be difficult. If you want to obtain financing, it is essential to understand the requirements for get a small business loan before applying.

Requirements by loan type

Type of loan Biggest Obstacle to Qualification
term loan Time spent in business
SBA loan Application process
Business line of credit Generate enough free cash flow
Commercial real estate loan Create reliable business income

If you need financing for your small business, there are several types of loans to choose from, each with their own terms and requirements. Commercial mortgages, for example, generally have lower interest rates than lines of credit, but they also generally charge a higher interest rate. credit score. SBA loans are easier to obtain than bank loans, but have greater documentation requirements than most other forms of financing.

Outraged, SBA Loans are not meant to be a borrower’s first option. Applicants for SBA financing are believed to have first tried to obtain financing elsewhere and been turned down – so keep that in mind when deciding which loan is right for you.

Although requirements vary by loan type, you probably won’t qualify for any type of business financing unless you meet certain minimum criteria. These include having a credit score of 600 or higher (640 for SBA loans) and a minimum debt service coverage ratio of at least 1.15 to 1.3 – meaning that you should have at least 15% to 30% more free cash flow than what your loan payments will cost you each month. Online lenders like Quick funding may offer more flexible terms than conventional lenders, such as banks or credit unions. [Read our full review of Rapid Finance for business lending.]

5 Steps to Qualifying for a Small Business Loan

In order to obtain a loan, small business owners must follow a set process. When applying for financing, borrowers must provide extensive information about themselves and their business so that lenders can assess their risk and creditworthiness.

Failing to take the right steps can hurt business owners’ credit and reduce their chances of getting financing. So, if you want to get a loan, be sure to follow these steps.

1. Do your research.

Before applying for a small business loan, it is important to research and understand the different types of loans available. You need to know the requirements for the types of loans that may be right for you, as well as the repayment options and types of documents that will be required for approval.

2. Choose a loan.

Once you have considered various loans that may be right for your small businessdecide which ones might work for you based on your business needs and desired repayment terms, as well as which ones you might be eligible for.

When deciding on a type of financing, be sure to consider loans with rates and terms that are realistic to your credit score and income – not the best possible terms advertised by lenders, to which you may not qualify.

3. Choose a lender.

Once you know what type of loan you want, you need to find someone to give you the loan. If you have an existing relationship with a bank or other lender, it’s usually a good idea to check it out first. If you don’t already have a relationship with a lender, try to find one that specializes in the type of financing you want and offers repayment terms that work for you.

4. Assess yourself.

When you’ve decided on the type of loan you want and the lender you want to use, there’s one last step before you apply – and that’s to assess yourself as a borrower. Check your credit using Credit Karma or another tool, and review your own finances to make sure you have the credit score to qualify and can afford your payments.

When checking your finances, make sure your income and expenses can be documented. If you can’t document parts of your income, your lender may not be able to consider that income as part of your loan application.

Once you’ve assessed your credit and finances, ask yourself if you would approve your loan if you were a lender. If the answer is no, take steps to improve your credit for your finances before going ahead with a loan.

5. Ask for a loan.

Now that you have chosen a lender and assessed your chances of being approved for financing, you need to apply. This process varies from lender to lender, but it’s usually quite simple and involves several pages of paperwork.

You should be aware that your financing application will require the lender to do a credit check, which will affect your credit score. That’s why it’s important not to apply until you’re ready, and to know what your lender will find when they review your application.

Also, when you apply for financing, you can start incurring costs. Since lenders have to perform credit checks or assess the value of the assets you are borrowing against, you may start being charged fees. If you have to pause your application and start it again later, you may have to pay this fee twice.

6. Tracking.

Even after applying for funding, your job may not get done. More often than not, you’ll need to follow up with your lender to provide additional documentation or explain specific items related to your income, expenses, or credit score.

If all goes well, you will be approved and close your loan. If you want to get approved for another loan in the future, you will need to comply with the terms of the loan, making payments in full and on time. You will either need to repay your loan on time or, if your loan is not fully amortized, start looking for a new loan to refinance the lump sum payment at least four to six months before your lump sum payment is due.

Other financing options

If you need a loan for your small business, four of the most common options are bank term loans, SBA loans, commercial lines of credit, and commercial mortgages. However, these options do not work for everyone. If you have poor credit or haven’t been in business long, you may need to find another way to fund your business.

If you need more options, there are three main types of financing for small businesses.

  • Factoring: If your business regularly invoices customers and you want to get your money faster to grow your business, factoring may be a great option for you. With factoring, you can essentially sell your unpaid invoices (for eligible customers) to get your money faster, and the factoring company takes responsibility for collecting payment from your customer.
  • Business credit cards: Small business credit cards work like personal credit cards – in fact, they’re usually based on the business owner’s personal credit. These cards can offer long 0% introductory periods and useful rewards for businesses that need to fund routine purchases.
  • Personal loan for business: If your business doesn’t have established credit or several years of revenue history, you may be able to get a loan based solely on the strength of your personal finances. With a personal loan, you can get financing without a lender having to consider your business finances. You’ll need to sign a personal guarantee, but you’ll probably need to provide one with a business loan anyway.

Small Business Loan Approval Tips

With the economy still struggling following the COVID-19 shutdowns, millions of small businesses need financing to survive the downturn. If you find yourself in this situation, it is important to maximize your chances of getting the money you need.

Follow these tips to give yourself the best chance of approval.

1. Leverage your connections.

When you start looking at loan options, don’t be afraid to contact people you know personally at banks or other lending institutions. Working with someone you know won’t guarantee you’ll be approved, but it can make the application process easier – and it helps to have someone who can vouch for your personality when the lender reviews your application.

2. Optimize your personal credit.

When you check your credit before applying for a loan, you will likely find negative items on your credit report. Whether it’s unpaid credit card balances, high credit utilization, or old credit accounts that have been closed but are still on your report, do what you can to improve. these elements. Your lender will eventually withdraw your credit, so it’s best to sort out these issues yourself first.

3. Come prepared.

When you are about to apply for a loan, it is advisable to first gather all your documents. Your lender is going to apply for them anyway, and putting everything together before you apply will help your lender make faster progress on your application. It will also reduce the number of gaps or items you need to clarify later.

Here are some things to prepare before applying:

  • Two years of tax returns
  • Balance sheet and income statement of your company
  • Commercial exploitation agreements
  • Identification and tax documents for anyone who owns 20% or more of your business

4. Don’t procrastinate.

Applying for a loan takes time. Even after being approved, you won’t necessarily get your money right away, so don’t wait until you need money to apply.

If your lender asks you for something to complete your application, be sure to get it to them promptly. Lenders usually try to process multiple applications at the same time, and each time they have to wait for something from you, your application goes down in their pile.

5. Know your options.

The final tip we have for borrowers is surprisingly simple, but it’s one that business owners often overlook: know what type of loan is right for you. before you ask. Applying for the wrong type of loan can mean that your application for financing will be refused and you will have to start the process over with a different type of loan. This can hurt your credit or even cause your business to close for lack of money.